INTRODUCTION TO EUROPEAN SOVEREIGN DEBT CRISIS

The European sovereign debt crisis has been created by a combination of complex factors such as: the globalization of finance; easy credit conditions during the 2002-2008 period that encouraged high-risk lending and borrowing practices; international trade imbalances; real-estate bubbles that have since burst; slow growth economic conditions 2008 and after; fiscal policy choices related to government revenues and expenses; and approaches used by nations to bailout troubled banking industries and private bondholders, assuming private debt burdens or socializing losses. From late 2009, fears of a sovereign debt crisis developed among investors concerning rising government debt levels across the globe together with a wave of downgrading of government debt of certain European states. Concerns intensified early 2010 and thereafter making it difficult or impossible for Greece, Ireland and Portugal to re-finance their debts. On 9 May 2010, Europe's Finance Ministers approved a rescue package worth 750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF). In October 2011eurozone leaders agreed on another package of measures designed to prevent the collapse of member economies. This included an agreement with banks to accept a 50% write-off of Greek debtowed to private creditors, increasing the EFSF to about 1 trillion, and requiring European banks to achieve 9% capitalisation. To restore confidence in Europe, EU leaders also suggested to create a common fiscal union across the eurozone with strict and enforceable rules embedded in the EU treaties. While the sovereign debt increases have been most pronounced in only a few eurozone countries, they have become a perceived problem for the area as a whole. Nevertheless, the European currency has remained stable. As of mid-November 2011 it was trading even slightly higher against the Euro bloc's major trading partners than at the beginning of the crisis. The three most affected countries, Greece, Ireland and Portugal, collectively account for six percent of eurozone's gross domestic product(GDP).

IS EUROPE DEAD???
Eurozone crisis was one of the most used terms through 2011, but few really

comprehended what the debt crisis was all about. So here is a simple Q&A to cut through the jargon.

What is the Eurozone crisis?

Also known as Eurozone debt crisis or Eurozone sovereign debt crisis, the term indicates the financial woes caused due to overspending by some European countries. Just like an individual, when a nation lives beyond its means by borrowing heavily and spending freely, there comes a point when it cannot manage its financial situation. When that country faces insolvency i.e. when it is unable to repay its debts partially or fully and lenders start demanding higher interest rates, the cornered nation begins to get swallowed up by what is known as the Sovereign Debt Crisis. Meanwhile, the term Eurozone indicates the combined region of 17 European countries that use Euro as their common currency. Currently Eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The monetary policy of the zone is the responsibility of the European Central Bank (ECB) which is governed by a board comprising heads of national central banks.

Which all countries are most affected by the Eurozonecrisis?

Greece is the country that has probably been the worst hit. Its debt had been spiraling even when it had not adopted the Euro as currency. A switch of currency only compounded the problem and opened the possibility of impact on other European countries. Besides Greece, Ireland, Portugal, Italy and Spain are among the countries facing financial crisis.

What is the impact of a Sovereign Debt Crisis and why is the entire Eurozone threatened?
A country embroiled in a Sovereign Debt Crisis may see the crumbling of its banking system, flight of investment and currency collapse. An economic crisis inevitably leads to lay-offs, closure of businesses, shrinking purchasing power and financial hardship for citizens. Europe has a unique system wherein 17 odd countries use a common currency. However the challenge is that different countries with varying levels of economic development and financial stability share the same money A situation of crisis in one has a ripple effect and can cause destabilization of the entire region. It is for this reason that countries like France and Germany with stronger economies have crafted bailouts for Greece.

How did the Eurozone debt crisis impact financial markets?

The Eurozone debt crisis impacted market sentiment. Investors became wary of putting in money into anything that seemed risky. The idea then was to invest in safe options like government bonds of finically sound countries. Overall, European bank stocks performed badly as did the bond markets of affected states, both of which had a negative effect on global markets.

What are the remedial measures being taken?

The first and the obvious reaction to the debt crisis has been ECBs plan to inject liquidity into financially unstable countries. Emergency loans have been extended as bailouts mainly by stronger economies like France and Germany, as also by the IMF. The EU member states have also created the European Financial Stability Facility (EFSF) to provide emergency loans. The ECB has promised to purchase government bonds, if necessary in order to keep yields at bay. Besides there has been a restructuring of the debt i.e. to let the crisis unfold in an organized and predictable fashion than allowing an erratic collapse. The problem with countries like Italy and Spain is that their economies may be too large to be bailed out. Austerity measures have been enforced. These, unfortunately, come with some harmful side-effects. While austerity is highly advocated for countries facing a financial crisis, the dilemma is that slowdown of spending would adversely affect growth rates which will also come down. Slow growth or negative growth in turn means shrinking incomes and jobs, which only go on to aggravate the crisis. So its a bit of a Catch 22.

12 point something in 2012

Several policy related issues may be resolved in the new year. These and macroeconomic factors such as results of state elections, eurozone troubles, and shortage of coal will have a glaring impact on investor sentiment. Hers the list 12 factors that have the potential to impact the performance of your equity portfolio in 2012 Coal Shortage Coal remains one of the most critical commodities for the Indian economy as it contributes more than 70% to the country's power generation. The domestic supply of coal from Coal India, the world's largest coal producer, is impacted due to land acquisition, environmental and logistical issues. The government's efforts on increasing coal production of Coal India and how it is able to handle land acquisition and environment issues will be critical. Commodities Gold prices may continue to rise if central banks in Europe and the US continue to use monetary easing tools they used in 2011 to buffer economic growth in their countries in 2012 as well. However, the supply of money in the global economy will determine the rise in prices of gold. Euro Zone Debt Crisis Concerns of sovereign defaults in the Euro Zone are far from resolved. And as leaders struggle to reach a consensus, the global economy will continue to suffer . For India, this means that exports to the region will take a hit as demand weakens. More importantly , the value of the local currency is likely to fall further as investment fund flows are not expected to improve. Also, there are 25 companies whose foreign currency borrowings will have be to be paid back in 2012. The prominent ones include Reliance Communications, Tata Motors, Tata Steel, Jaiprakash Associatesand JSW Steel.

FDI in Retail & Aviation If FDI in retail is approved, the overall sector will get a higher rating. Foreign direct investment (FDI) in aviation can prove to be a boon as these companies are heavily burdened by debt, with a huge chunk of their income going towards servicing debt. Foreign investments will help these companies bring down debt and use the cash for operational and investment purposes. GST & DTC The Goods and Services Tax, or GST, and the Direct Tax Code, or DTC, are progressive initiatives aimed at ensuring a simpler and uniform tax regime, covering both direct and indirect tax. Both GST and DTC are likely to improve tax collections thereby boosting the exchequer. This will help in sustaining the country's long-term GDP growth. Geo-political Tensions Geo-political tensions have become an ever-growing important factor in global economics in recent years - particularly due to its impact on crude oil prices. The 'Arab Spring' in the initial months of 2011, which saw political upheaval in several countries in the Middle East and North Africa (MENA), took oil prices above $100 per barrel. IFRS International Financial Reporting Standards (IFRS) are used for reporting financial results of profit-oriented entities. Developed by International Accounting Standards Board (IASB), these standards are expected to be implemented in India in a phased manner. IFRS is intended to improve comparability of financial statements of companies across the globe thereby encouraging investments from global entities

Land Acquisition Bill The Union government has sought to bring greater transparency and also update the archaic laws related to land acquisition in the country through Land Acquisition, Rehabilitation and Resettlement Bill, 2011, which was recently introduced in Parliament. This bill will provide a legal framework by which the government acquires land for its own use and for transferring it to private companies. At first glance, this bill would increase the cost of land acquisition by private companies for greenfield projects. Analysts highlight this may force the industry to move further away from urban areas.

Lokpal Bill The enforcement of Lokpal Bill, touted as the transparency law, would send a positive signal to the international community of financial investors. Opening up the government machinery for public scrutiny will boost the confidence of institutions investing in the country. To this effect , it will have an immediate positive impact on the sentiment prevailing in the home market.

State Elections 2012 is an important year in terms of elections . Assembly elections are slated to be held in seven states in India, starting from the largest state of UP to the smallest state of Goa. The results of these elections will have a possible bearing on the government's ability to bring in economic reforms at the Centre.

New Telecom Policy The recent recommendations of the Telecom Regulatory Authority (TRAI) are directed towards bringing in simpler norms for spectrum sharing and mergers and acquisitions in the sector. Larger players with pan-India presence , including Bharti Airtel, Reliance Communications, and Idea Cellular, will be in a position to utilise these norms once accepted and implemented to boost their operating efficiency.

RBI's Monetary Policy Reserve Bank of India's (RBI) broader monetary policy that decides the country's interest rates will play an important role in determining the economic growth rate in 2012. Economists have reduced their expectation of gross domestic product (GDP) growth to 6.7% for the year to March 2012 from upwards of 7%. The rate of food inflation has reduced in the past few weeks. These factors reflect a possibility of lower inflation in the future thereby setting the stage for RBI to consider a more benign interest rate policy. Such a stance would be critical in bringing back the retail and industrial demand for credit thereby boosting consumption in both the categories.